COVID 19 & Bad Debt Provisions

Due to the COVID 19 pandemic, there is an increasing emphasis on the recoverability of receivables and the possible need for bad debt provisions.

Your entity’s yearend is going to be quite important when determining whether the effects of COVID 19 on your receivables should be an adjusting or non-adjusting event. For those whose yearend was 31 December 2019, before the pandemic was declared, it is likely that any such effects of COVID 19 would be disclosed as a non-adjusting post balance sheet event. However, those yearends which fall on or after 31 March 2020, and are therefore more likely to see the effects of the pandemic in their financial year, will need to adjust their financial statements for any accounting issues arising as a result of COVID 19.

Businesses should review their position in detail as some industries have been more adversely effected by the impact of COVID 19 compared to others.

There is little guidance under FRS 102 and FRS 105 in relation to bad debt provisions. It is likely that a number of businesses will face cash flow issues for an extended period of time and therefore it may be difficult for such businesses to meet their liabilities as they fall due. FRS 102 and FRS 105 do not permit the use of general provisions, therefore businesses will need to review individual receivables to determine the likelihood of payment, taking into consideration the effect of COVID 19 on such customers, and determine whether a specific provision is required.

Under IFRS 9, effective from 2018, the requirement for the recognition and measurement of impairment of financial assets is slightly more complicated. Preparers of financial statements under IFRS need to use the ‘expected credit loss (ECL)’ model. Under such a model, preparers must determine the likelihood of default in the coming 12 months and apply this to the outstanding debtor balance.

Simple Illustration – Expected Credit Loss

Current Value of Receivable £1,000
Estimated future cash flows following a default £800
Shortfall £200
Probability of default 10%
Expected credit Loss (provision) £20

COVID 19 will have a considerable impact on expected credit losses as there is likely to be a significant increase in credit risk. The IASB guidelines outline that “In assessing forecast conditions, consideration should be given both to the effects of COVID-19 and the significant government support measures being undertaken”. Therefore where supplies are being made to entities which are benefiting from government support, this will increase the likelihood that such receivables will be recoverable.

It is worth noting that only specific provisions, such as those under FRS 102 and FRS 105, attract tax relief.            

If you require assistance in preparing your financial statements, please contact us on 0207 306 9100 or email us on